Monetary Policy
Following its November meeting, the RBA announced further rate cut support for the economy. In particular:
- The cash rate was cut from 0.25% to 0.1%
- The 3-year Australian Government bond target was also reduced to 0.1%, as was the lending rate charged to banks (the so-called Term Funding Facility)
These changes were widely anticipated. Much of the financial market focus was on whether a Quantitative Easing (QE) policy would also be implemented (where the RBA buys bonds in the financial markets with an aim to reduce longer-term interest rates). It was. There will be a $100b program to buy Federal and state Government bonds with maturity of between 5 and 10 years.
As the pace of spending was quicker than had been anticipated, longer-term interest rates fell following the announcement. There was only a small downward movement in the $A (and that was more than fully reversed in the subsequent hours). That would have been something of a disappointment to the RBA given that a lower $A was an explicit outcome they hope to achieve from the monetary easing. But of course they have yet to begin their buying program.
The RBA is targeting two key economic outcomes: inflation returning sustainably above 2% and an unemployment rate dropping back towards ‘normal’ (under 6%). The RBA has revised down its view on the unemployment rate, now expecting a peak of 8% around the end of this year then falling to 6% by end 2022 (the unemployment rate is currently about 7%).
September quarter economic performance
One of the reasons that the RBA revised down its unemployment rate forecast was that the economy has done better than it was expecting. The maths said the economy had to have had a decent Q3. Three-quarters of the Australian economy were able to go out and buy a coffee again. I look for September quarter GDP growth to grow stronger than the current consensus (2-3%).
Such a bounce in growth was consistent with the feedback from firms. Companies said that conditions in the September quarter improved although remained some distance from ‘normal’. Order books were getting fuller but were still relatively light. The export outlook was better albeit tough. Firms are giving thought about adding a few more staff, although they are some distance from going on a hiring binge. Margins remain tight.
October and the outlook
So growth bounced back in the September quarter. And it looks like things improved further in October. The Budget announcement would have helped. Construction has benefited from a souped-up HomeBuilder program. The JobKeeper and JobSeeker income support programs are still around (albeit less generous). The RBA gave clear signals in October that interest rates would be cut further.
All up, the signs are that the economy improved in the September quarter. And the Budget and talk of lower interest rates looks to have helped things in October. The opening up of the Victorian economy should see the economy get a further boost through November and December.
But it is far from clear that underlying economic momentum is enough to create the number of full-time jobs necessary to take a big chunk out of the under-utilisation rate. Or to get the inflation rate back above 2%. The RBA and the Government have done a lot. They still may have to do more. The good news is that judging by their actions in the year to date, they will.